Stay or go

EIRA, a 38-year-old Venezuelan, used to like shopping. Now she stands beside barren shelves in a Caracas supermarket. The average Venezuelan spends 35 hours each month queuing for food. This supermarket’s few products include Kellogg’s Zucaritas, its muscular tiger cartoon strangely pallid in hue—supposedly to make the packaging more eco-friendly but, many Venezuelans reckon, more likely the result of an ink shortage.

The dearth of goods reflects the fact that Venezuela, led by Nicolás Maduro, the president, is in freefall. The International Monetary Fund expects output to shrink by 10% this year and inflation to top 700%. Businesses are prostrate. The country has never been rich, but having the world’s largest oil reserves once meant many citizens could afford foreign brands. Not now. Firms have long grappled with price controls, bizarre labour laws, the threat of expropriation and, since 2003, currency restrictions. Plunging oil prices have further exposed the system’s frailty. As the bolívar’s value has tumbled, firms with profits in the currency have reported big losses—for example, Merck, an American drugmaker, announced a hit to its earnings of $876m for 2015.

For most firms, there is no easy solution. Two years ago Clorox, which makes household products, decided to leave. That meant giving up not just sales but assets: the government seized its factories. A more common approach has been to “deconsolidate” a subsidiary. When a country’s rules are so restrictive that a parent firm cannot control its local operations, American accounting rules let a firm mark its subsidiary to fair value and classify it as an investment. The parent company’s earnings no longer recognise profits stuck in Venezuela, but the subsidiary continues to exist. Goodyear, a tyremaker, and Ford, a carmaker, have done this. The cost of the accompanying write-down can be high—for Procter & Gamble, it was a whopping $2.1 billion. But the move lets firms maintain some presence in Venezuela in the hope that the country might someday recover.

Those that have stayed operate in a morass. The government controls where goods are sold, often directing products to neighbourhoods where it wants to boost political support, explains Risa Grais-Targow of Eurasia, a research outfit. Parts and supplies are scarce. Many firms get creative. Coca-Cola Femsa, a Mexican bottler that is partly owned by the American drinks giant, has little sugar, for example, so it is making diet soda.

For the staff who remain, the outlook is bleak. Threats of arrests of employees are common, since Mr Maduro blames shortages of essential items on a guerra económica waged by foreign and local firms to stir discontent. Companies cannot afford to raise wages at the pace of inflation. Some are at least providing a few important necessities. Many workers are bringing their cafeteria lunches home, to share with their families. Given the conditions, one former executive of a multinational who is based in Caracas thinks that foreign firms are hanging on for too long. But they doubtless hope that tenacity will benefit them if and when a new regime comes.